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You can issue a stop order, which instructs your broker to buy or sell a security once it trades at a certain price, called the stop price.
Stop orders are entered below the current price if you are selling and above the current price if you are buying. Once the stop price is reached, your order becomes a market order and is executed.
For example, if you owned a stock currently trading at $35 a share that you feared might drop in price, you could issue a stop order to sell if the price dropped to $30 a share to protect yourself against a larger loss.
The risk is that if the price drops very quickly, and other orders have been placed before yours, the stock could actually end up selling for less than $30. You can give a stop order as a day order or as a good 'til canceled (GTC) order.
You might use a buy stop order if you have sold stock short anticipating a downward movement of market price of the security. If, instead, the price rises to the stop price, the order will be executed, limiting your loss.
However, there is a risk with this type of order if the market price of the stock rises very rapidly. Other orders entered ahead of yours will be executed first, and you might buy at a price considerably higher than the stop limit, increasing your loss.
- Browse Related Terms: All or none order (AON), confirmation, day order, Fill or kill (FOK), Good 'til canceled (GTC), open order, Stop order